Friday, 11 May 2012

Do we need a double-dip recession to rebalance our economy?

The UK is officially in a double-dip recession.

What does this mean?

Lets look at the UP GDP chart for the last few years: 

From looking at this graph, it is clear that the recession really started in 2008, and the downturn was quite severe from top to bottom.

Gordon Brown was facing a re-election (not to be confused with the fact that he was never elected either as party leader or the prime minister) for the Labour party. Brown really had limited choices:

1. Let the recession run its course, let the private and public sector deleverage and the economy rebalance from the artificial boom in credit for the decade before that. This would purge the mal-investment in the economy, redirect Capital and Labour to where it is really needed instead of where it was during the boom.

2. Run up the largest peace time budget deficit, direct the Bank of England to start QE and push the problems to a future date (to a date beyond the next elections).

What is clear is the obvious correlation between the temporary recovery in the GDP and the growth of the UK budget deficit from the start of the recession till 2010. Was the recovery real? I don't think so. Its no different than say if everyone in the country went out and maxed out their credit cards for the next month. Sure we would have a higher GDP for this period, but we are likely to have a lower GDP the following month when we have to pay the bills back and cut back spending.

In the credit boom period (2001-2008), the UK had a housing bubble, a consumption bubble and a public sepnding bubble. All fuelled by artificially low interest rates by the Bank of England (Mervyn King might disagree with me on this, but then that's his job to protect the institution).
As a result, the UK economy allocated resources into things that they shouldn't have. The rebalancing of this would necessary have a very severe recession (as Capital and Labour moves from unproductive ventures into more productive ones).

A recession must not be feared, but be embraced as a cure for the artificial boom in Credit and mis-allocation of Capital. This is inevitable if we need long term growth and stability.

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